May 15, 2016

Econ 101 — worse than useless

Comment on Noah Smith on ‘Michael Strain and James Kwak debate Econ 101’


You summarize: “People like Krugman and Smith aren’t saying that Economics 101 is useless; ... The problem is that many people believe ... that those models are a complete description of reality from which you can draw policy conclusions ... “

Where the heck do people get these silly beliefs from?

Imagine a person has seen the promotion clips for a new car and decides to buy one. He jumps into the driver’s seat, starts the roaring engine, rolls a few meters, and then the car breaks down in a cloud of black smoke. The person takes the dealer to task and he explains that there is no problem with the car but ‘The problem is that many people believe that those promotion clips are a complete description of reality.’

It is exactly the same with economics. Economists advertise their stuff as science, well knowing that their theories/models break down at the next corner: “suppose they did reject all theories that were empirically falsified ... Nothing would be left standing; there would be no economics.” (Hands, 2001, p. 404)

In fact, there IS NO economics, there is merely Walrasianism, Keynesianism, Marxianism, Austrianism, and all four are provable false.

Given the proto-scientific state of economics, Noah Smith’s pedagogical advice “It seems bad to give kids too strong of a false sense of certainty about the way the world works.” is bordering on absurdity. Obviously, it would be much better not to teach the kids this scientific garbage in the first place.

The very purpose of Econ 101 is to teach students the true theory and not a false theory with the disclaimer not to take it seriously. “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

And this is the crux: economists do not have the true theory. And the root cause is that standard economics is built upon this set of foundational propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 147)

Methodologically, these premises are forever unacceptable because constrained optimization, rational expectations, equilibrium etc. are nonentities. This invalidates the whole theoretical superstructure from distribution to employment theory (2014a; 2014b). And this in turn fully explains why empirical tests run into a vacuum. Nonentities simply have no real counterpart. What has to be done first is to fix the theory. This means, the axioms HC1|HC5 have to go out of the window for good. Economics has to be rebuilt from scratch.*

Right policy depends on true theory, everything else merely amplifies the confusion.

The necessary paradigm shift, though, is not to be expected from people who have not realized until this day that supply-demand-equilibrium or IS-LM are methodologically indefensible constructs that cannot be taken seriously for one minute. Economics, though, is caught in secular stagnation: “... most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248).

Econ 101 is not entirely useless, it provides ample evidence that one can sell any green cheese behavioral assumption and any absurd claim and any scientific garbage and any silly excuse to economic students.

As far as the future of economics is concerned that much is certain: it will take place without hand-waving half-wits like Strain and Kwak and Krugman and Smith or, for that matter, without useless Walrasians, Keynesians, Marxians, and Austrians.

Egmont Kakarot-Handtke

Hands, D.W. (2001). Reflection without Rules. Economic Methodology and Contemporary
Science Theory. Cambridge, New York, NY, etc: Cambridge University Press.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Kakarot-Handtke, E. (2014a). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Kakarot-Handtke, E. (2014b). Towards Full Employment Through Applied Algebra and Counter-Intuitive Behavior. SSRN Working Paper Series, 2456184: 1–25. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

* See ‘From microfoundations to macrofoundations